1.

In each of the following situations, identify if there is a positive or negative

externality in play. Explain you answer thoroughly.

a. A local bridal shop shares a strip mall with eight other businesses.
Recently all have agreed that the signage at the road needs a facelift.
Although all eight businesses use the sign, the other seven are not willing
to pay for a fresh paint job. The bridal shop decides to foot the bill and, on
their own, they update the sign. Is there a positive or negative externality
in play? Why?
This is a positive externality because since the bridal shop, Party A, is paying for
the signage of Road B, and the seven other business are benefiting (Party C),
they are experiencing a positive externality because they get to enjoy the effects
of the service someone else paid for.
b. A local church holds a "4th of July Celebration" and invites everyone in
their area to come enjoy free bounce-houses, live music and snow cones.
Again, this is a positive externality. The church (Party A), is paying for Service B, and
the community, (Party C), is benefiting from the payment Party A made to another
Party/Service.
c. A local high school decides to expand their bus ramp to help buses get in
and out of the school more quickly. The construction process takes two
months and creates serious traffic issues for the commuters in that area of
town.
This is a negative externality because Party A, the local highschool, is paying for a
service, (Party B), which negatively effect, obstructs, and technically makes Party C, the
commuters, pay.
2. The noise pollution coming from the block party next to your house is a negative
externality that can be accurately measured. The table below shows the marginal
social benefit and the marginal social cost per decibel (dB, a measure of volume)
of music.
a. Draw the marginal social benefit curve and the marginal social cost curve.
Use your diagram to determine the socially optimal volume of music (use
Fig. 2 from the lesson to help you get started).

b. Only the attendees of the block party benefit from the music, and they
bear none of the cost. Which volume of music will they choose?
The attendees will choose the maximum volume, 97 decibels, because that provides
them with the most benefit.
c. The police are called in because of complaints from surrounding
homeowners. They impose a Pigovian tax of $3 per decibel of music
played. From your diagram, determine the volume of music the block party
attendees will now choose.
The volume of music the block party attendees will choose will fall to Pmkt at a
quantity of Qmkt, as depicted on the graph. This is because that now a tax is
imposed, they yield to a point where cost is equal to social benefit.
3. If you get the H1N1 Flu vaccine, not only are your chances of getting sick
reduced, but you being healthy also benefits the people you interact with on a
daily basis.

a. Assume that the marginal cost of each H1N1 flu shot is constant and is
equal to the marginal social cost and that the demand curve is downward
sloping (use Fig. 1 to help you get started).

b. Will the marginal social benefit curve be higher, lower, or the same as the
demand curve? Why? Draw the marginal social benefit curve into your
diagram.
The marginal social benefit curve will be higher, but it will be moving higher as the
demand curve. This will be because the general public will benefit from the amount of
people who get vaccinated because it improves general health. (Changes have been
made accordingly, to the graph in 3a.)
c. In your diagram, show the market equilibrium quantity and the socially
optimal quantity of flu shots. Is the market equilibrium quantity of flu shots
socially efficient? Why or why not?
Yes, the market equilibrium quantity of flu shots is socially efficient because the point
where supply meets demand is equal to the marginal social benefit. In the long run
though, the producer may need a subsidy to stay profitable, after all, it provides a
positive externality. (Changes have been made accordingly, to the graph in 3a.)
d. Many university health centers offer free flu shots to students and
employees. Does this solution necessarily achieve efficiency? Using your
diagram, explain your answer.
Yes, this solution does achieve efficiency because it raises the positive externality felt
by the students and faculty at the university. Free flu shots mean a higher level of
general health and vaccinated students. The university will require a subsidy for the free
flu shots by the government to promote the program. (Changes have been made
accordingly, to the graph in 3a.)
Price
Quantity
Qmkt Qopt
Pmsb
Pqpt
Pmkt
Emkt
O
S=MPC
D=MSB/MPB